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Sentiment-prone investors and volatility dynamics between spot and futures markets

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  • Corredor, Pilar
  • Ferrer, Elena
  • Santamaria, Rafael

Abstract

This paper analyses the role of investor sentiment in the contemporaneous dynamics of spot and futures markets and in volatility spillovers between them. To explore this issue, we analyse spot and futures markets on stock market indexes in different countries: the S&P500 for the US, and a representative set of European indexes (CAC40, DAX30, FTSE100, IBEX35 and EuroStoxx50). Consistent with expectations, we have shown that the correlation is not stable with the level of investor sentiment. More specifically, the correlation between the two markets diminishes significantly during periods of high investor sentiment. Moreover, volatility shocks in either market are also found to have less impact during these periods. These results are compatible with behavioural finance theories suggesting that high investor sentiment leads to an increase in noise trading and a decline in arbitrage activity due to institutional investors' attempts to limit their risk exposure.

Suggested Citation

  • Corredor, Pilar & Ferrer, Elena & Santamaria, Rafael, 2015. "Sentiment-prone investors and volatility dynamics between spot and futures markets," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 180-196.
    • Handle: RePEc:eee:reveco:v:35:y:2015:i:c:p:180-196
    DOI: 10.1016/j.iref.2014.09.013
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    2. Corredor, Pilar & Ferrer, Elena & Santamaria, Rafael, 2019. "The role of sentiment and stock characteristics in the translation of analysts’ forecasts into recommendations," The North American Journal of Economics and Finance, Elsevier, vol. 49(C), pages 252-272.
    3. Liu, Hsiang-Hsi & Chuang, Wen-I & Huang, Jih-Jeng & Chen, Yu-Hao, 2016. "The overconfident trading behavior of individual versus institutional investors," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 518-539.
    4. Turkmen Muldur Gozde & Kandir Serkan Yılmaz & Onal Yıldırım Beyazıt, 2019. "Investor Sentiment and Speculative Bond Yield Spreads," Foundations of Management, Sciendo, vol. 11(1), pages 177-186, January.
    5. Piyapas Tharavanij, 2017. "Unbiasedness Hypothesis and Efficiency Test of Thai Stock Index Futures," SAGE Open, , vol. 7(2), pages 21582440177, April.
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    7. Jiqian Wang & Feng Ma & Chao Liang & Zhonglu Chen, 2022. "Volatility forecasting revisited using Markov‐switching with time‐varying probability transition," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1387-1400, January.
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    More about this item

    Keywords

    Investor sentiment; Noise traders; Spot–futures correlation; Volatility spillovers;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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